Extreme Networks - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 delivered sequential and year-over-year acceleration: revenue $285M (+34.8% YoY, +1.8% QoQ) and non-GAAP EPS $0.21, both above internal guidance and Wall Street consensus; GAAP EPS was $0.03.
• Management raised FY25 revenue outlook to $1.128B–$1.138B (from $1.120B–$1.138B), citing a stronger funnel and conversion rates; Q4 revenue guided to $295M–$305M with non-GAAP EPS $0.21–$0.25.
• Product momentum (wireless strength, campus fabric wins) and improved mix drove strong margins (non-GAAP GM 62.3%); SaaS ARR rose to $184M (+13.4% YoY).
• Balance sheet shifted to net cash of $3.0M, operating cash flow $30.0M, and $13M in buybacks; Board authorized $200M repurchases over FY26–FY28.
• Tariff headwinds (~$1.5M, ~50 bps GM impact) are incorporated in Q4 guidance, with pricing flexibility available if needed; management reports minimal demand impact to date.

What Went Well and What Went Wrong

What Went Well

• Competitive wins and larger deal sizes: 40 customers >$1M bookings, best product bookings quarter in 6 quarters; strong Americas sequential growth (+21%) and EMEA YoY growth (+81%).
• Platform ONE traction and MSP expansion: ~100 customers subscribed; MSP partners grew to 48; early demand signals and attach expected to accelerate ARR.
• Strong cash generation and improved working capital: net cash position achieved ($3.0M), operating cash flow $30.0M, free cash flow $24.2M; inventory and cash conversion cycle improved.

Management quote: “We continue building momentum for Extreme Platform ONE, the industry’s only solution to offer holistic AI for networking… reducing complex tasks from hours to minutes. Nearly 100 customers have pre-ordered Platform ONE”.

What Went Wrong

• Gross margin dipped QoQ on mix (higher product vs subscription/support), though still +470 bps YoY; Q4 margin guide embeds tariff headwind.
• Subscription/support revenue was stable QoQ, with ARR growth lagging product revenue mix; management expects ARR acceleration as Platform ONE rolls out and new subscription bookings convert.
• Opex expected to rise in Q4 ($143M–$145M) on Connect conference costs and higher commissions, partially offset by operating leverage.

Transcript

Operator (participant)

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Extreme Networks Q3 FY25 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star, one. Thank you. I would like to hand the call over to Stan Kovler, Senior Vice President, Corporate Development and Investor Relations. Stan, you may begin your conference.

Stan Kovler (SVP of Corporate Development and Investor Relations)

Thank you, Ian. Good morning and welcome, everyone, to Extreme's Third Quarter Fiscal 2025 Earnings Conference Call. With me today are Extreme Networks President and CEO, Ed Meyercord, and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for Fiscal Q3. A copy of the press release, which includes our GAAP and non-GAAP reconciliations, and our earnings presentation, are available in the IR section at extremenetworks.com. Today's call and Q&A may include certain forward-looking statements based on our current expectations about Extreme's future financial and operational results, growth expectations, and strategies. Our financial disclosures made on this call will be on a non-GAAP basis unless stated otherwise.

We caution you not to put undue reliance on these forward-looking statements as they involve risks that can cause actual results to differ materially from those anticipated by these statements. These risks are described in our risk factors in our 10-K and 10-Q filings, and any forward-looking statements made on this call reflect our analysis as of today. We have no plans to update them except as required by law. Following our prepared remarks, we will take questions. I will turn the call over to Extreme's President and CEO, Ed Meyercord.

Ed Meyercord (President and CEO)

Thank you, Stan, and thank you all for joining us this morning. Revenue in the quarter reached $284.5 million, representing a 35% increase year-over-year, growing sharply in EMEA and Americas regions, with a particularly strong performance in the Americas, sequentially up 21% from the prior quarter. We're seeing robust demand across both our wired and wireless network solutions. Revenue grew sequentially for the fourth quarter in a row, driven largely by product revenues, and we achieved our best quarter of product bookings in six quarters. We're encouraged by new logo wins and the growth in average deal sizes. This quarter, we had 40 customers generating over a million dollars in bookings, up from 36 last quarter. This highlights our move up market, with success penetrating larger enterprise customers across all our industry verticals.

Our competitive position continues to strengthen with significant wins against major players and key accounts such as City of Everett, Washington, West London NHS Hospital, and the United Soccer League, and two major government agencies in Japan. We’re seeing customer behavior patterns shift towards larger, more comprehensive deployments. Looking ahead, we have strong confidence in sustained customer demand based on our Q3 funnel generation and with continued strong growth in our pipeline. Our competitive win rates are on the rise across a variety of verticals. We’re displacing major players like Cisco, HP, and Juniper, largely due to our highly differentiated campus fabric solution, the simplicity of our cloud solution, and our flexible licensing. When customers see the impact of Fabric’s unique features like subsecond convergence, the unmatched security benefits of microsegmentation, and the ease of deployment with automated zero-touch provisioning, Extreme becomes an easy choice.

One higher education customer recently told us, "With zero-touch provisioning, automatic configuration, and unified network management across 14 locations, they've been able to reduce IT workloads by almost 50%." If enterprise customers spec our technology, competitors cannot match these features with their limited IP data center fabric, and it causes them to drop out of the competitive pitch. In the quarter, customers such as Ferrovienord, an Italian transport company overseeing 120 regional railway stations covering provinces such as Milan, Varese, and Como, chose ExtremeCloud and Extreme Fabric to streamline network management, ensure consistent performance and low latency, and create secure network segmentation across its sites. The City of Everett, the seventh largest city in Washington State, upgraded its network and moved to a flexible, cost-effective network infrastructure-as-a-service model from Extreme.

During the upgrade, they can continue to manage aging third-party devices with ExtremeCloud IQ while automating and provisioning new devices with Extreme Fabric, making it fast and easy to upgrade with no downtime. Also, Duquesne University chose Extreme Fabric and ExtremeCloud IQ because of the streamlined way Fabric will help minimize some of the IT team's most arduous tasks. HP Hood, a large dairy company in the U.S., recently upgraded to ExtremeCloud to manage operations across its 20 manufacturing and distribution centers. Extreme's seamless integration with Zebra devices was a significant factor in winning that deal. We continue to expand our footprint in the Six Flags theme parks with new deals in Six Flags Magic Mountain and Fiesta Texas.

Each deployed ExtremeCloud alongside a new 6 gigahertz wireless network, which will create real-time monitoring and management of rides to reduce downtime, deliver more efficiency in park infrastructure, and reduce operating costs. They’re also receiving Extreme’s premier white glove professional services for installation. We also had a nice win with a large law firm in North Carolina, which has 24 offices and more than 450 employees. They were using legacy HPE infrastructure, which made it very difficult for their team to manage the network across several locations. With ExtremeCloud and Universal ZTNA, they’ll be moving operations to the cloud, simplifying the IT and employee experience and increasing security of their network. Extreme’s new ZTNA SaaS solution is gaining momentum with strong interest from customers in education, manufacturing, healthcare, and financial services. It combines mature network access control with zero-trust remote application access.

We're also seeing strong momentum with our commercial models. We added 11 new partners to our MSP program this quarter, bringing the total to 48. We offer the industry's first consumption-based billing model, eliminating upfront costs and ensuring cost predictability. Our unique poolable licensing lets MSPs flexibly allocate licenses across devices, locations, and customers, making it easier than ever to scale. In the quarter, we made Extreme Platform ONE available for MSPs. With everything centralized, Platform One helps MSPs gain a comprehensive view of each client's network health, performance, and security status. The VP of Technology Alliances at our partner, Logicalis, said, "With Extreme Platform ONE, we can efficiently manage all of our clients under one platform, which will significantly reduce the time and IT staff required to maintain operations." On the innovation front, early indications from customers and partners reinforce that Extreme Platform ONE will be a game changer.

It's the first solution that offers holistic AI for networking. It drives significant automation by leveraging AI agents that assist in tasks across the entire network lifecycle, from planning and deployment to management and remediation, reducing the time to complete complex tasks from hours to minutes. As enterprise teams feel pressure from executive leadership and their boards to leverage AI to drive operating efficiencies, Extreme Platform ONE will provide the most modern tools to achieve this objective. According to a survey we conducted with 200 C-level executives earlier this year, 89% are ready to invest in a platform for AI networking and security. Earlier this month, we made Extreme Platform ONE available to E-Rate customers. To date, we have approximately 100 customers that have subscribed to the platform.

We are excited to share more details about Extreme Platform ONE at our oversubscribed Connect user conference in Paris, which is happening next month. Our customers are enjoying the best quality products in Extreme's history. We see this in our data and our financial results, as well as service costs, which are running at record lows, and customer satisfaction, which runs consistently at high levels. We anticipate further market share gains and revenue growth for the full year and continued strength in Q4. We expect this growth to be accompanied by increased margins and cash flow for the full year. With that, I'd like to turn the call over to our CFO, Kevin Rhodes, to walk us through the results and guidance.

Kevin Rhodes (EVP and CFO)

Thank you, Ed. This quarter marked the fourth quarter in a row of sequential growth, and our strong gross margins, coupled with operating expense control, demonstrated the significant operating leverage in our model. We achieved earnings per share of $0.21, in line with the prior quarter, up significantly year-over-year, as well as exceeding the high end of our guidance range. Customer demand trends continue to improve, particularly with large customers. I'm happy with our financial results for the third quarter, defying normal seasonality and demonstrating continued momentum across our business. Total revenue for the third quarter reached $284.5 million, up 2% sequentially and an impressive 35% year-over-year. Product revenue increased to $178.1 million, up 3% quarter-over-quarter and 67% year-over-year, with wireless solutions showing particular strength, growing 12% sequentially.

Our subscription business continues to grow double digits, with SaaS annual recurring revenue reaching $184 million, up 13.4% year-over-year. Total deferred recurring revenue grew 7% year-over-year to $578 million, reflecting the strong momentum in our recurring revenue model. Overall, recurring revenue was relatively stable at 35% of total revenue in the quarter as a result of rising product revenue. The strength of our execution is evident in our financial results, with particularly strong performance in the Americas region, which grew 19% year-over-year. EMEA revenue grew 81% year-over-year due to improved macro and channel inventory. APAC was flat year-over-year in revenue; however, bookings were up double digits. Overall, this is the best bookings quarter in the past six quarters.

Product bookings grew high single digits, similar to what we called in our long-term range, and we see continued strength in our pipeline this year. Trends were in line with our revenue during the quarter, and the product backlog was once again within our expected range. I'm particularly pleased with our performance in new subscription bookings, which bodes well for an acceleration of SaaS ARR going forward, as new subscription bookings will continue to grow with the adoption of Platform One going forward. On a product basis, bookings were ahead of the previous five quarters, driven by continued strength in Wired. By industry, government, transportation and logistics, manufacturing, and sports and entertainment verticals all grew strong double digits, both year-over-year and sequentially. Within education, K through 12 bookings, including E-Rate, also grew double digits over both periods.

In fact, our E-Rate filings were up double digits from the prior year, and we believe we are gaining market share in this segment, even though it accounted for less than 5% of total bookings in the quarter. All in, we are well diversified across a variety of other verticals. Total subscription and support revenue was $106.4 million, similar to the second quarter. Our recurring revenue growth has been driven by the strength of our cloud subscription revenue in the past. Gross margin for the quarter was 62.3%. While this represents a 110 basis point sequential decrease, it is up 470 basis points year-over-year on a reported basis or 120 basis points on an adjusted basis for E&O. Product margin came in at 58%, and subscription and support margin remained strong.

These margins reflect our continued focus on operational efficiency and product mix optimization, along with lower freight costs. We're also buying less inventory and have reduced the overall inventory quarter-over-quarter. Yet we still have ample supply of finished goods and raw materials to mitigate against any potential tariff risk. The structural improvements we've made to our portfolio within our Universal Platform have resulted in improvements in the product quality, lower service costs, and lower remediation costs that are also benefiting our customers. The combination of higher product revenue versus subscription and support did have a small impact on sequential results. We also expect our gross margin to be in a range of 61.8%-62.8% in the fourth quarter of fiscal 2025, also owing to higher product revenue mix expectations. Non-GAAP operating income was $40 million in the quarter, representing a 14.1% operating margin.

Operating expenses were well managed at $137.3 million. This demonstrates our commitment to operational discipline while continuing to invest in growth initiatives. During the quarter, we maintained our strategic investments in R&D and marketing to support our product innovation and market expansion efforts. We expect operating expenses to increase to a range of $143 million-$145 million in the fourth quarter of fiscal 2025. Sales productivity and better efficiency from our new commercial models are driving some of this updated outlook. We continued our commitment to returning value to shareholders through our share repurchase program as we repurchased $13 million worth of shares during the quarter. In addition to our remaining authorization for fiscal 2025, the board recently authorized another $200 million of buybacks for the next three years, starting in fiscal 2026.

Turning to our balance sheet and cash flow metrics, I'm pleased to report significant improvements in our financial position. We've successfully transitioned to a net cash position of $3 million as of March 31, a notable improvement from our net debt position of $15 million at the end of the year and at the end of December. Our disciplined financial management improved our cash conversion cycle by a remarkable 29 days. This reduction demonstrates our enhanced operational efficiency and working capital management. As a result, we generated robust operating cash flow of $30 million during the quarter, contributing to our strengthened liquidity position. We expect a continued improvement in cash flow in the fourth quarter as we continue to grow revenue again and also improve profitability.

The combination of strong cash generation, improved working capital management, and disciplined cost control positions us well for sustained financial performance and continued investment in growth opportunities. Now turning to guidance. We are encouraged by the level of customer engagement and growth in the funnel that we are seeing, which should bode well for us heading into the final quarter of this fiscal year. As a result of our improved visibility, we are increasing our full-year guidance and providing a slightly narrower revenue range for the next quarter. Our supply chain optimization efforts are paying off, and strategic pricing adjustments can be made to mitigate any potential tariff impacts. To date, we have not seen any negative impact on the demand side of the equation related to tariffs.

Therefore, we believe we're well positioned to capitalize on the trends that we are seeing and deliver a sustained growth in the coming quarters. For the fourth quarter, we expect improved guidance as follows: revenue to be in a range of $295 million-$305 million, gross margin to be in a range of 61.8%-62.8%. At this point in time, we estimate the impact of tariffs on our P&L will be fairly negligible at approximately $1.5 million in the fourth quarter and a similar amount going forward. This expectation is currently included in our guidance. Operating margin is expected to be in a range of 13.3%-15.3%, and earnings per share is expected to be in a range of $0.21-$0.25. Our fully diluted share count is expected to be around 134.2 million shares.

For the full year of 2025, we expect for the full year of fiscal 2025, we expect revenue to be in a range of $1,128 million-$1,138 million. With that, I'll now turn the call over to the operator to begin the Q&A session.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of David Vogt with UBS. Your line is opened.

David Vogt (Analyst)

Great. Thanks, guys. Thanks for taking my question. Ed and Kevin, you mentioned you're not seeing any weakness or any impact from the tariffs. Can you maybe walk through some of the feedback that you're getting from customers to date, what they're thinking, how they're thinking about the next 6 to 12 months? On the tariff impact that Kevin referenced, that $1.5 million in the fourth quarter and going forward, it sounds like that's going to be the run rate next year. Should we think about that as being sort of just a gross margin headwind as we go into fiscal 2026 next year? What are the offsets that you could potentially use to mitigate that incremental $6 million of hit to the COGS. Thanks.

Ed Meyercord (President and CEO)

Yeah. Thanks, David, for the question. Kevin, I'll kick it off, then I'll let you pick it up. I'm hearing a bit of an echo here on the line. Yeah. David, the tariff situation is very dynamic, I think, as everybody knows and can appreciate, and it's kind of hard to call. There was concern initially given the magnitude of the tariffs. Keep in mind that our manufacturing on the cost side of the equation, we have Taiwanese ODMs, and historically, factories were in China. We moved out of China to Taiwan, Vietnam, Philippines, and Malaysia in partnership with our manufacturers. Obviously, they were slapped with very large tariffs that looked pretty scary. They were put on hold. Our category was exempt. Currently, there's minimal impact to our business.

At the same time, all of these countries are in active negotiations with the Trump administration, and our understanding is that they're going to strike a deal, and the indication is that it's going to be somewhat status quo. We won't know for sure until this 90-day window in the beginning of July ends, and we have finality to that. One of the things that we've done as a company is we've come out, and we've guaranteed customers current pricing through the end of the quarter. We're the only player in the industry that's done that, but it's been very well received by partners and customers. We have seen, I would say, minor early buying for customers that want to get ahead of tariffs and mitigate risk of potential price increases. It is somewhat of a fluid situation there.

The larger question is, will all of the changes globally in trade and tariff policy have an impact on demand? That's hard to call at this point. We're going to hold as far as providing guidance or judgment on that until we have finality come July. Kevin, do you want to add to that?

Kevin Rhodes (EVP and CFO)

Yeah. Sure. I think on the latter part of the question around the $1.5 million and any mitigation there, right, David? Yes, we baked that into the fourth quarter guidance. As Ed said, we're holding on the price increases right now. Obviously, the most obvious mitigation strategy there would be, as we get more color, more visibility into whether they might be permanent or not, we can always raise price. It would be a small price to raise to offset that $1.5 million per quarter. Right now, in the fourth quarter, we kind of took the adjustment, if you will, in the fourth quarter. I would say, in general, we're feeling good about where we are right now, and we're not seeing a lot of impact on the demand, which is what we commented on.

Obviously, we have plenty of levers to pull if we need to in order to offset, I guess.

David Vogt (Analyst)

Kevin, just to clarify, so eating it in the fourth quarter, the gross margins would be basically flat sequentially ex the tariff impact?

Kevin Rhodes (EVP and CFO)

Yeah. That's correct, David. Yeah. It's about 50 basis points impact on the quarter that we've baked into our guidance. Obviously, with EPS being higher than Q3, we're still showing continued improved profitability there.

David Vogt (Analyst)

Great. Thanks for the color, guys.

Kevin Rhodes (EVP and CFO)

Thanks, Steve.

Operator (participant)

Our next question comes from the line of Michael Genovese with Rosenblatt Securities. Your line is opened.

Michael Genovese (Senior Research Analyst)

Great. Thanks. I guess any more color on sort of competitive trends broken out between Cisco, Juniper, HP? Anything evolve in the last quarter that was different than before?

Ed Meyercord (President and CEO)

Yeah. Thanks, Mike. I can take this, Kevin. Yeah. I think you've seen HPE is, I think, struggling, quite frankly. I think if we had to provide commentary, we'd say that they're probably losing share in the marketplace. The fact that their deal is held up, the fact that they had to pay such a high price for Juniper on an inflated demand curve. I think now that they're well over a year into the process and have a trial coming up in July, has created some issues for them in the market and in the channel. They still very much want to get the deal done. We've seen Juniper get a little more aggressive in pricing to win business. They're somewhat in the same situation as HPE because they're stagnant.

They can't provide real guidance to the channel or customers as to the future of the product roadmap, the technology, the solutions. They don't know. That's helpful to us. I think we would expect that if the deal goes through, there to be a lot of changes that take place. Either way, our view is that it's a positive for Extreme. Cisco has actually been pretty strong and competitive in the marketplace, hanging on to their market share. I don't really have a lot to report on that front, except for the fact that with their focus as it relates to Splunk and driving SaaS revenue, observability, security, they seem to be moving away from or less focused on enterprise networking. There are solutions there. This is what we hear from customers and partners. They remain the most complicated, unintegrated, and expensive solution in the marketplace.

The chorus of dissatisfaction from Cisco continues to grow. The larger deals that we're talking about, in most cases, these are competitive wins from Cisco. The final comment I'll make is that Cisco has said that they're overhauling their partner program. Keep in mind, we sell and the industry sells through the channel, the partner channel, to 85% of our business. Anytime you go through a massive restructuring of your channel program, there are going to be winners and losers in that. Any kind of disruption, we're Extreme will be right there to try to around the edges to pick up new partner relationships to drive share gain.

Michael Genovese (Senior Research Analyst)

Great. Thanks, Ed. That's a lot of great color. Very helpful. Kevin, I guess I just have to ask. I mean, it's great that SaaS ARR is in the double digits, but to see bigger numbers going forward, bigger double-digit numbers, year-over-year growth in SaaS ARR, potentially in the fourth quarter and going into next year, what should we be looking for to drive that?

Kevin Rhodes (EVP and CFO)

Yeah. A couple of things here, right? One, we actually had very good bookings on our SaaS subscription in the quarter. Of course, that will take a little bit of time to work itself into revenue, but that was up 29% year-over-year. We were happy about that. The second thing is, as we talked about, Platform One, right, has a combination of subscription and support in it. It has a higher ASP. It also has expected higher attach rate to it as well. That is going to start to drive more subscription overall. That is a combined, just a reminder, that is support and subscription along with AI. All those features all combined in one subscription model. That is going to drive subscription ARR over time too. I am optimistic about what that growth rate looks like in the future.

I know it's been somewhat sloppish overall as a revenue line item, but I think it will grow over time.

Michael Genovese (Senior Research Analyst)

Perfect. I'll pass it on, but nice to see the performance, and please keep it up.

Kevin Rhodes (EVP and CFO)

Thanks, Mike.

Ed Meyercord (President and CEO)

Thanks, Mike.

Operator (participant)

Our next question comes from the line of Christian Schwab with Craig-Hallum Capital. Your line is opened.

Christian Schwab (Senior Research Analyst)

Great. Thanks for taking my question. Great quarter. Thank you so much for the additional color on the competitive position in Cisco and HP and Juniper and how you're positioning there. I'm just wondering if you could just elaborate one step further. Given your stronger success with larger customers in competitive wins versus your three top competitors, I'm wondering if you could just give us some further color on what you believe or what your customers are seeing regarding the total cost of operation is and your competitive advantage versus them. I imagine you have some color there and why you're seeing success with large customers in particular.

Ed Meyercord (President and CEO)

Sure, Christian. Thanks for the question and for joining us. Yeah. The big differentiator for us today is our fabric technology, which is unique in the industry. It's novel. Most fabrics in the networking industry are designed for data centers and managing all the traffic flows inside of the walled secure data center. When we acquired Avaya, which had sort of the Nortel technology, they had invested heavily in, and since we have invested heavily in a campus fabric, which is very different. It's designed specifically for these large enterprise campuses. When we win Washington University, when we win John Deere, when we win resorts and casinos, when we win these larger deals, this fabric gives us the capability to provide significant advantages in automation and deployment, zero-touch provisioning, the elimination of constructing and building VLANs and deployment environments.

We're also able to segment the network into a single physical network, and you can slice it into literally thousands of networks. Each network can have its own SLA. Importantly, because of the way the technology works, with the segmentation capability, we hide IP addresses, and effectively, it brings significant security benefits. Speed to provisioning, the security benefits, and the ease of deployment and creating networks within a network, which is so valuable. Finally, the resilience of our fabric. We talk about subsecond convergence. Our competitors can't do it. If we get in and if we can convince customers to spec the performance, just the performance of our fabric technology, we win every time. Customers that buy our fabric are very loyal. Most people don't believe the benefits that we talk about in terms of what we're pitching.

When they see and they try and they test our technology physically hands-on, they're kind of blown away. They become very religious about it. This is a primary differentiator for us. When we get into competitive processes, if we can convince customers to try out our fabric, they're kind of blown away, and that's what's driving larger deals and higher win rates. The simplicity of our cloud solution is also a big factor. As we look at Platform One, as you know, Christian, we were not investing in networking for AI. Strategically, it was not where we've been investing, but we have been investing heavily in AI for networking.

Today, there's not a single organization where leadership, boards, management are not pressuring saying, "How are you using AI to drive efficiency in the organization?" We are positioned to be that player to provide the tools and the platform for all the enterprise customers out there to leverage our tools to answer that question and say, "Yeah, we're leveraging AI. We're using Extreme, and we're going to be that go-to provider for AI and networking." I'd say it's those two trends. It's the differentiation of our fabric. By the way, that fabric technology will be available to be managed and visualized from Extreme Platform ONE, which is also a game changer. It's fabric and then AI for networking and our differentiation and what we believe will be a significant leadership position ahead of our competition in enterprise.

These are the big drivers right now in the marketplace. I'd say our competitive position, we feel very good about our competitive position.

Christian Schwab (Senior Research Analyst)

Fantastic. Thank you. Just one quick follow-up question or a second question is, do you have any update on customer adoption and what you're seeing regarding Wi-Fi 7?

Ed Meyercord (President and CEO)

I would say it's moving according to plan. Wi-Fi 7, the advantages of Wi-Fi 7 are around performance. I'd say bandwidth and performance. Years ago, Christian, there was a lot of discussion about public, private cellular networks and 5G. The performance and the quality of Wi-Fi 7 has kind of obviated that discussion because the performance is so strong. We're seeing enterprises adopt Wi-Fi 7 for mission-critical solutions that historically they might not have been confident using Wi-Fi. I'd say it's progressing. Kevin, you can jump in if you want to add commentary here, but I think it's, yeah, the adoption is strong. The quality is a lot higher in terms of the user experience. For us, I'd say it's according to plan.

Kevin Rhodes (EVP and CFO)

Yeah, I agree. It's tracking in line, and I would say the adoptions and the teams, so that's good.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Thanks, guys.

Ed Meyercord (President and CEO)

Thanks, Christian.

Operator (participant)

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Ryan Koontz with Needham. Your line is opened.

Ryan Koontz (Senior Analyst)

Great. Thanks for the question and all the great color here post-prepared remarks. Maybe double-clicking here on your channels and kind of your view from a regional perspective, Europe versus North America inventory and kind of enterprise versus public. What kind of feedback are you getting from channels, and what kind of demand are you seeing? You mentioned a little bit of a pull forward, perhaps, in third quarter. Any more color that you can give us would be appreciated. Thank you.

Ed Meyercord (President and CEO)

Yeah. Thanks, Ryan. I guess I should reiterate that the pull forward in Q3 was very minor. There wasn't a big move there, and I would say across all of our geos. I wouldn't say that's a major factor yet. It could be depending on how the tariff situation evolves. The macro situation in the industry has improved. A year ago, the whole industry was correcting an oversupply situation, and we had to let product drain out of the channel. We feel like we've worked all the way through that now, and you can see that in the quarter over the year-over-year compares, quarter-over-quarter. As the channel has drained, we've seen kind of real demand return back into the marketplace, which has been very helpful and positive to the business. We've had strength in Americas.

On the Extreme side, a lot of this has to do with the quality of our execution as a company in taking share. We reorganized a year ago. We have new leadership and sales and new processes that we're driving. We have enhanced programs that we're going to be rolling out for the channel and significantly improved and enhanced marketing. The alignment between our sales and marketing is really an execution-driven improvement and performance from the Extreme perspective. The macro here has continued to be solid for networking. If you survey CIOs, demand for networking and demand for AI is very high and consistent. When you think about it, everything runs on the network. People have to continue to modernize and invest there. We believe we're going to have tailwinds going forward from Europe.

We're heavily concentrated in the DACH region, which is Germany, Austria, and Switzerland, primarily Germany. Germany has been a major headwind over the past year because of their own issues, the government issues there. They couldn't form a coalition. They dissolved the government. They froze government spending. They had snap elections. They reformed the government. They have a coalition. They've raised the deficit spending ceiling, and they have a budget. Now we're going to see a resumption of spend in that market. That is our largest market, and it's where we have the highest market share in the world. We're very encouraged by what we expect to see coming out of Germany. We'd like to see it happen faster, but it is a tailwind that's coming out of Germany. The other thing that we've done is we have some unique wins.

We highlighted in Japan, the government ministries there. We're having some of the largest wins in our company history in that market. Our unique fabric deployments and the solution that we built for the government there is creating some really interesting opportunities and growth opportunities there. We have seen a resurgence in Asia-Pacific being led through Japan, and we expect to see a nice tailwind in Europe in general. I'll also mention in the U.S., the E-Rate business, we had a very strong E-Rate cycle, up double digits in terms of our wins, and the funding cycles are continuing unabated. We just had our largest funding wave in company history last week. We are feeling good about the macro trends here as we go into Q4.

Ryan Koontz (Senior Analyst)

That's great. Thanks for all that color, Ed. And Platform One, are you seeing early traction there across any particular geos?

Ed Meyercord (President and CEO)

I'd say it's across the board, Ryan. We made Platform One available for early quoting. We had to do that for the E-Rate cycle, and that's giving us an early indication of demand for Platform One. There, as we said, we have approximately 100 customers that have signed up for Platform One. We've opened it up for the Platform One workspace for MSPs, and the feedback we're getting there is encouraging. Our MSP business is weighted more heavily in Europe. I think I'd say it's across the board from a geo perspective. Where we've rolled out Extreme Platform ONE early, we've had very favorable response, both, again, that E-Rate segment as well as MSPs. We're targeting our fiscal Q1 for the official launch of the platform.

Ryan Koontz (Senior Analyst)

Perfect. Thanks for all the color.

Operator (participant)

Our next question comes from the line of Dave Kang with B. Riley. Your line is opened.

Dave Kang (Senior Research Analyst)

Thank you. Good morning. First, a clarification. Regarding this tariff impact of $1.5 million, I guess that's about 50 basis points on gross margin. I assume that's in your fiscal fourth quarter outlook. Is that correct?

Ed Meyercord (President and CEO)

That's correct, David. That's what I said. Yep. That's included.

Dave Kang (Senior Research Analyst)

Okay. Got it. Thank you. Regarding manufacturing, I think you went over it already, but just regarding your contract manufacturers, I assume they have a global footprint. I am wondering if they have any U.S. manufacturing facilities. For example, Sanmina said the other day that they are planning to expand their U.S. footprint. I am just wondering what your CM's situations or plans are.

Ed Meyercord (President and CEO)

Yeah. Good question, Dave. The answer is no. Our ODMs do not have plans to open manufacturing here in the U.S. I will say our expectation is that from a tariff perspective, we are expecting that they will get resolved with the Trump administration. The supply chain for our technology, and it's not just Extreme, it's the entire industry, it's going to be very hard to replicate that supply chain in the U.S. at prices and costs that are competitive. We would expect that to take a long time and would not impact near-term results.

Dave Kang (Senior Research Analyst)

Got it. My last question is regarding the government vertical. I know government, you're more of a state and local, but do you have any U.S. federal programs? Can you provide any update or color?

Ed Meyercord (President and CEO)

Yeah. Our federal business is we view federal as an opportunity. One of the things we did not highlight on the call is that we have invested in certifications so that we qualify for federal government projects. We have completed some of these certifications, which is opening up new opportunities for us in the federal space. If you look at our results for the quarter and for the last year, our federal business is really immaterial. This, for us, is more of a growth opportunity where we are looking at cloud, we are looking at our fabric differentiation. With new certifications, we are creating new opportunities. For us, it is more of a growth vector. One of our federal we have partners that we work with.

As the government is looking for new ways to drive better outcomes and to change current practices with new vendors to drive savings and efficiencies, that puts Extreme in a pretty good position. We are kind of excited about the potential growth that we have in federal despite what is going on from a macro perspective vis-à-vis gross spend, perhaps.

Dave Kang (Senior Research Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is opened.

Eric Martinuzzi (Senior Research Analyst)

Yeah. I appreciate the insight on the early buying, the small amount of early buying by your customers. What about your own inventory planning? Are you buying ahead? I realize it might not be something that runs through the P&L in Q4, but it might impact cash.

Kevin Rhodes (EVP and CFO)

Yeah, Eric, I'll cover this one. The good news is, right, you're starting to see our inventory levels, our own inventory levels come down. We've already normalized at the channel level, but even our own inventory, we're starting to get better working capital optimization there. I think I said in my prepared remarks, we have kind of curtailed some of the buying that we have because we had a lot of finished goods and raw materials that we were still working through. The reality is that's obviously a working capital improvement story for us going into the fourth quarter as we continue to work to normalize that. I would say we're still doing well there, and we've got plenty of inventory that's non-tariffed that we can continue to sell into the market. That's what gives us confidence to not raise price in the fourth quarter.

We will assess again when things at the tariff level start to normalize and we figure out where that looks in July.

Eric Martinuzzi (Senior Research Analyst)

Okay. On the OpEx side, you mentioned $137 million was the non-GAAP OpEx number in Q3. That is going up to $143 million-$145 million. In Q3, I had you for a little bit more than that. I was higher than where you guys actually came in. Is there an expectation that $143 million-$145 million that you are going to be investing in R&D personnel or sales personnel, or is that just all tied to kind of fiscal year-end variable comp?

Kevin Rhodes (EVP and CFO)

Right. There's a couple of things in there, right? The Connect Conference, which Ed mentioned, the oversubscribed Connect Conference in Paris. We're going to have 1,000 attendees there. That's one of our larger marketing events and customer events for the year. That's baked into the $143-$145 numbers. That's a good, I'll say, a couple of million to a few million dollars of expense that we have in the fourth quarter. Naturally, in our fourth quarter, where we've got higher revenue coming through that we're expecting right now, we'll have higher commissions in the fourth quarter that we're also baking into our guidance there. Those are probably the two major reasons for the increased OpEx. We are continuing to make growth investments in areas, both sales, marketing, as well as innovation.

As you know, we've been very prudent throughout the year on that to try and drive more and more profitability. I think I'm just happy where we are from a contribution to the bottom line and seeing the top line kind of contribute to the bottom line as we've kind of maintained a lot of our OpEx to be fairly flat, even though we're driving more revenue growth and more innovation as a company. We've done a good job there.

Eric Martinuzzi (Senior Research Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from the line of Tim Horan with Oppenheimer. Your line is opened.

Tim Horan (Managing Director and Senior Analyst)

Thanks, guys. Can you give us a sense of how big your data center business is now and kind of how that's trending? Secondly, on the go-to-market, are you seeing actual improvements per salesperson at this point in terms of bookings and productivity? Thanks.

Kevin Rhodes (EVP and CFO)

Yeah. Thanks, Tim.

Ed Meyercord (President and CEO)

Yeah. If you want to come from behind, our data center business is, Tim, it depends on what your definition of a data center is. For enterprise data centers on-prem, in terms of how we look at that business, that's probably—and I'm going to provide a range, Kevin, and you can back me up—but I'm going to say kind of 10-15% of our overall business. As I said before, we're playing more on that on-prem data center for enterprise customers in general for the broader market. We have specific applications. We have with Ericsson, with Verizon. We have unique, yeah, high-end. We had our first 400 Gbps sale, which is a very specific use case for Ericsson and what we would consider more of the service provider category, which for us is just a very targeted kind of niche opportunities.

More broadly, we are refocusing on the evolution of the enterprise data center and the requirements and what we believe how that will evolve. From a productivity perspective, look, we're expecting as we move up market and we sell larger deals, that brings productivity to us. As we improve our partner programs and we drive business through the channel and the channel generates business for Extreme, that drives productivity. I think we believe that we have an opportunity for productivity gains as we go forward.

Tim Horan (Managing Director and Senior Analyst)

Great. Is there any more clarification on that?

Ed Meyercord (President and CEO)

Kevin, I don't know, Kevin, if you want to, Kevin, if you want to comment or provide any more specificity on the data center side.

Kevin Rhodes (EVP and CFO)

No, Ed, I think you nailed it. That's the range. I think you're right. It's a little less than 15%, but it's between 10 and 15%.

Tim Horan (Managing Director and Senior Analyst)

I guess you expect that business to grow faster than the overall company. It seems like data center space is pretty hot right now.

Ed Meyercord (President and CEO)

Yeah. For us, our success has really been driven, as I mentioned before, Tim, by our fabric technology and cloud. That tends to be more campus-oriented. Where it gets a little fuzzy is that campuses have data centers. The question is, what's your definition of a data center? Clearly, it's not hyperscale. One of the nice things about our fabric technology is it extends from the enterprise data center and the core of a network all the way out to the edge and actually for the application that we built for the Japanese government across the wide area network across SD-WAN. The fabric is a great campus technology from the data center all the way out to the edge, again, that our competitors don't have. It gets a little fuzzy when you start trying to define, well, what is that data center?

Because some can be smaller and some might consider it to be more of kind of a campus core network, which is a little bit different. We are looking at the campus enterprise. To the extent that the data center is on campus, that would be included and where we are expecting growth.

Tim Horan (Managing Director and Senior Analyst)

Very helpful. Thank you.

Kevin Rhodes (EVP and CFO)

Ed, you might just want to add that we're coming out with a 400 Gbps switch at the end of the summer, that that will actually be part of data center for enterprises as well.

Ed Meyercord (President and CEO)

Yes. Yep.

Operator (participant)

There are no further questions at this time. I'd like to hand the call back over to Ed Meyercord, President and CEO, for closing remarks.

Ed Meyercord (President and CEO)

Ian, thank you. Thanks, everybody, for attending the call. I want to shout out to employees, customers, partners who may be listening in, our employees especially for their hard work. Extreme, we fight above our weight class, and that's really due to all the hard work of the employees at the company. I'll also mention that I'll encourage people to tune in to Connect. We're less than three weeks away. We're in Paris. We have over 1,000 people in attendance. This is by far our largest user conference, and it's fueled by interest in Extreme Platform ONE as well as Fabric. There is a lot of content there. It's going to be a very full session, but we are going to record and broadcast some of the main stage presentations. I would encourage investors to tune in.

are going to be some really interesting reveals as far as our technology innovation as it relates to Extreme Platform ONE. With that, thank you for your participation and have a great day.

Operator (participant)

This concludes today's conference call. You may now disconnect.